JPMorgan’s $1.13 million dual direction notes linked to oil index aimed at range-bound trade

By Emma Trincal

New York, June 16 – JPMorgan Chase & Co.’s $1.13 million capped dual directional contingent buffered notes due June 21, 2016 linked to the S&P GSCI Crude Oil Index Excess Return target investors who believe oil prices will trade sideways over the next year, advisers said. The product delivers an attractive payoff if their view is correct, they added.

If the index finishes at or above the initial level, the payout at maturity will be par plus the gain up to a maximum return of 17.5%, according to a 424B2 filing with the Securities and Exchange Commission.

If the index falls by up to the 17.5% contingent buffer, the payout will be par plus the absolute value of the index return.

Otherwise, investors will be fully exposed to any loses.

The S&P GSCI Crude Oil Index Excess Return index is composed entirely of WTI crude oil futures contracts.

Sideways

Kirk Chisholm, wealth manager and principal at Innovative Advisory Group, said the range of crude oil prices that could translate into a positive return, from negative 17.5% to plus 17.5%, is “reasonable.”

“Oil right now is at $60. A 17.5% increase on the upside would bring the price to $70. On the downside it would bring it to $50 approximately,” he said.

“If someone is bullish on oil, this is probably not an attractive note. If you’re bullish, a $10 move on the upside, given that oil fell from over $100, is not going to be the appropriate investment type because of the cap.”

But Chisholm said crude oil is more likely to trade within the boundaries of a channel rather than breaking out of it.

Risk-reward

“I feel oil is going to be bouncing around for a year. It will bounce within that range, somewhere between $50 and $70. I think it’s reasonable,” he said.

The downside risk is breaching the barrier. If the underlying index falls by more than 17.5% at maturity, investors have no protection and could lose their entire investment, according to the prospectus.

Chisholm said it is unlikely to happen.

“Oil prices have already hit the low $40s. It would be hard to go much lower,” he said.

On the upside, investors could see the cap work against them if oil were to rise above $70 a barrel.

“It’s always a risk, but I don’t think the fundamentals support the fact that it will be much higher or much lower at that point,” he said.

“When oil was trading about $100, it was too expensive. The U.S. had produced a lot of oil with the oil shale boom, and it was not recognized by supply and demand in the market. Now it finally is.

“The fact that you have a positive return for anything within that $50 to $70 range is quite reasonable.”

The upside potential is attractive, he noted, especially if the market continues to trade without a clear direction.

“Getting 17.5% for a year is pretty darn good, and if you’re getting that kind of gain on the downside as well, it far outweighs the risk of oil going up over the upper end of the range,” he said.

“From a risk-return standpoint, it’s a very attractive note.”

Opportunistic play

Dean Zayed, chief executive of Brookstone Capital Management, said he is very interested in absolute return notes in general as the structure and payoff type are gaining momentum in today’s range-bound market.

“I absolutely love the dual directional structures, and they have certainly resonated with my clients,” he said.

A growing number of absolute return notes, also called dual directional or “twin-win” notes, have recently been brought to the market, especially in equity, he said, pointing in particular to notes linked to the S&P 500 index.

“I find these structures appealing, especially for the nervous investor,” he said.

The advantage of the product type is to give investors flexibility as they can make money in a down or up market as long as the barrier is not breached, he explained.

“Without possessing the proverbial crystal ball that nobody has, this note gives the investor the opportunity for competitive returns without having to be ‘right’ about the price of oil over the next year,” he said.

Aging bull market

The structure does not eliminate risk, yet it reduces it for those who do not anticipate wide price moves.

“A 17.5% move in any underlying over one year is not out of the question but still provides a large enough cushion in most of the market cycles we face,” he said.

“Structured products will never satisfy every type of investor sentiment but at least provide the clarity up front and allow the investor with a specific opinion to use the product if it fits within his general opinion. It is the clarity that is as important as the range itself.

“It is a short duration, the cap is very attractive, and if you think oil has roughly seen its worst price levels, this is a great play on it.

“As the aging bull market wears on, I see huge demand for more of these total return structures across other indices.”

J.P. Morgan Securities LLC was the agent.

The notes (Cusip: 48125UTJ1) settled on Tuesday.

The fee was 1%.

© 2015 Prospect News.
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